Banking in South-East Asia

Recuperating

A blighted industry returns to health

SOUTH-EAST ASIA'S more upbeat bankers will tell you that they have finally put the meltdown of 1997 behind them. Lending is growing again; profits are back; and capital is more than adequate. Endless gloomy analysis of non-performing loans has given way to giddy speculation about takeovers: this week Singapore's United Overseas Bank (UOB) looked set to buy most of Bank of Asia, Thailand's ninth-biggest bank. Pessimists point out that governments still meddle, legal systems are not yet up to scratch and balance sheets are not quite what they seem. In one sense, however, the debate is moot: whatever their strengths and weaknesses, banks matter much less to the economies of South-East Asia than they once did.

For the time being, optimism prevails, thanks in large part to renewed economic growth. Non-performing loans in Indonesia have fallen from 50% of the total in 1998 to just 5% today. They are below 15% in Thailand, Malaysia and the Philippines. The ratio has been cut partly by restructuring and partly by loan growth, which reached 5% or more last year in most of the region's largest economies.

But South-East Asia's bankers have not been just twiddling their thumbs, waiting for an upturn. Like bankers elsewhere, they have tried to instil better risk management and have reduced their dependence on corporate lending by pushing consumer finance, using all sorts of new products and marketing techniques. In Malaysia, mortgages, consumer credit and loans to small businesses now make up about half of all lending, up from a third before the crash. Some in Malaysia and Indonesia are pushing Islamic banking. In Thailand, Kasikornbank is opening branches with coffee shops, while the state-owned Government Savings Bank is experimenting with 24-hour service.

Regulators, too, have smartened up their act. Since the crash, most have tightened their definition of non-performing loans and raised capital-adequacy requirements. Indonesia, Malaysia and Thailand are all reforming their deposit-insurance schemes. Regulators have also forced banks to consolidate: Singapore now has only three commercial banks and Malaysia has ten. Thailand has introduced new licensing requirements aimed at reducing its count from 13 to three or four.

Most heartening of all, governments are beginning to sell the banks they took over during the crash, leaving less scope for political interference. All this has prompted a wave of cross-border takeovers, as Singaporean banks, long South-East Asia's strongest, snap up stakes in their weaker counterparts. UOB already owns most of Radanasin, a Thai bank, and is acquiring 23% of Indonesia's Bank Buana. Its rivals, OCBC Bank and DBS Bank, own or hold stakes in Thai, Malaysian, Philippine and Indonesian banks, and want to buy more.

However, the region's banks are not yet as healthy as all this might imply. For starters, the reduction in non-performing loans is deceptive. Some 35% of current Thai loans were once classed as bad and many have been only superficially restructured. Nor does loan growth in Thailand bear much scrutiny. Two state-owned banks, Krung Thai and Siam City, account for over half the new lending. Under instructions from the government to jolly the economy along, they are piling into volatile assets such as property even as their private-sector rivals try to cut their exposure. One private-sector banker recounts how some of his most hopeless customers had no trouble refinancing their loans at state banks.

Such blithe handouts demonstrate the risks of state ownership. Despite recent sales, over half of Indonesia's banking system and a third of Thailand's remain in government ownership, as do stakes in big banks in Singapore and Malaysia.

Nor has stricter regulation cut out hanky-panky. Indonesia has suffered two banking scandals in the past year. Much of the $60 billion the Indonesian government spent bailing out banks disappeared without trace, yet only a handful of bankers have been prosecuted. Across the region, creditors still have trouble enforcing their rights: legal struggles over big debtors such as Thai Petrochemical Industry and Asia Pulp & Paper continue.

At least such deficiencies matter less than they used to, since banks are no longer the only source of financing for South-East Asian businesses. Last year Thai companies raised almost as much from share and bond issues as they did from bank loans. Throughout the region, according to Noritaka Akamatsu of the World Bank, banks' share in the financial sector is decreasing. That, most observers agree, is unambiguously good news.